Are Exxon’s New Emissions Targets Enough for BlackRock?

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It is possible, of course, that Exxon Mobil Corp.’s Monday-morning announcement of new emissions targets has nothing to do with the recent arrival of an activist shareholder calling for a more sustainable strategy at the oil major. Exxon took the trouble to say “the plan is the result of several months of detailed analysis,” and, with 2020 targets about to be yesterday’s news, an update of some sort was due in the near future.

Still, it’s fair to assume the calls from Engine No. 1 LLC and D.E. Shaw & Co. didn’t exactly delay Exxon’s PR department on getting this out.

The bigger issue is how much it matters. That largely depends on what the likes of BlackRock Inc. make of it. Even after losing the best part of $170 billion over the past three years, Exxon’s market cap remains huge and largely retail investor-owned. Forcing change requires co-opting the big money managers, especially those that have explicitly called for companies to take climate change seriously — such as Larry Fink’s shop.

Exxon offers a few things to quell rebellion (the announcement mentioned “input from shareholders”). The company says it expects to meet the methane and flaring targets for this year set in 2018. New targets for 2025 portend big reductions in emissions “intensity” for Exxon’s operations, a measure of the quantity of greenhouse gases released per unit of oil and gas produced. Exxon will also “align” with an initiative to eliminate routine flaring from wells by 2030. These measures “support the goals of the Paris Agreement,” according to Exxon.

For the company once helmed by Lee Raymond, these are profound moves. The problem is that Raymond hasn’t been CEO for 15 years. And as subsequent events have shown, his vocal skepticism about climate change has proven both to be wrong and, importantly, increasingly out of step with public attitudes and investment trends. Exxon warmed up to the concept of climate change, so to speak, after he departed the boardroom but remains a relative laggard. 

This was evident in Monday’s announcement. Reducing emissions intensity has the benefit of being very much under Exxon’s control and certainly mitigates the pace at which greenhouse gases enter the atmosphere. But mitigating climate change requires significant reductions in absolute emissions; if you cut emissions per barrel but produce more barrels, the planet doesn’t give you a gold star for effort. Moreover, Exxon focuses on so-called scope 1 and 2 emissions — those generated by the company’s own operations, effectively — which usually account for only about 15% of the total emissions from oil and gas production and use. Scope 3 emissions — generated by the actual use of fossil fuels — are the ballgame.

For an example of how this works, look at rival Chevron Corp. It already has targets for reducing Scope 1 and 2 emissions intensity, and these fell by 20% between 2016 and 2019. Yet with production rising 18% over that period, absolute emissions from operations fell by only 6%. Moreover, include scope 3 production emissions, and the absolute amount actually increased by 8%.

Chevron at least reports scope 3 emissions numbers. Exxon now says it will begin doing this in 2021 — but would like you to know this is a largely meaningless gesture on its own:

ExxonMobil will also provide Scope 3 emissions on an annual basis, but notes that reporting of these indirect emissions does not ultimately incentivize reductions by the actual emitters. Meaningful decreases in global greenhouse gas emissions will require changes in society’s energy choices coupled with the development and deployment of affordable lower-emission technologies. 

Honestly, that paragraph could have ended at “basis” and worked just fine. It is self-evident that reporting numbers doesn’t make a difference on reducing emissions. On the other hand, it does draw attention to the issue, and the data provide a better basis for taking actions that might do so.

And as noted above, scope 3 numbers tend to illustrate quite clearly the inherent limitations of intensity targets in actually reducing emissions overall. In its latest World Energy Outlook, the International Energy Agency posits that a Sustainable Development Scenario — which the IEA says meets the aims of the Paris Agreement — would see oil and gas demand fall by 9% through 2030, versus an 8% increase under business as usual. That would be an enormous swing for an industry that has enjoyed secular growth for a century or more. Under an even-more stringent “net zero by 2050” scenario, oil demand drops by a third.

As Exxon might point out, scenarios don’t amount to anything more than numbers on a screen without meaningful action on actual energy supply and consumption. True enough. In a sense, though, that chimes with what the activists are demanding.

Noting Exxon’s evident stumbles in the allocation of capital over the past decade, their point is that it risks further destruction of value if “society’s energy choices” — as Exxon puts it — change more quickly than the company anticipates. Engine No. 1’s letter didn’t specify what Exxon’s energy transition strategy should be; rather that the company demonstrate a commitment to new thinking on this.

On that front, Monday’s announcement doesn’t hit the mark. In terms of tactics, however, its impact rests on something else: how far Fink et al are willing to go in making sure their own pronouncements amount to more than just words on screens.

This is a production-weighted average for Chevron's upstream oil and gas operations. All figures and calculations derived from Chevron's 2019 Performance Data report.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

©2020 Bloomberg L.P.

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